Some Confidence Is Lacking In Hangzhou Prevail Optoelectronic Equipment Co., Ltd.'s (SZSE:300710) P/S

It's not a stretch to say that Hangzhou Prevail Optoelectronic Equipment Co., Ltd.'s (SZSE:300710) price-to-sales (or "P/S") ratio of 4.3x right now seems quite "middle-of-the-road" for companies in the Communications industry in China, where the median P/S ratio is around 4.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Hangzhou Prevail Optoelectronic Equipment

What Does Hangzhou Prevail Optoelectronic Equipment's P/S Mean For Shareholders?

For example, consider that Hangzhou Prevail Optoelectronic Equipment's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou Prevail Optoelectronic Equipment will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Hangzhou Prevail Optoelectronic Equipment?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hangzhou Prevail Optoelectronic Equipment's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 22%. As a result, revenue from three years ago have also fallen 41% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 46% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Hangzhou Prevail Optoelectronic Equipment's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Hangzhou Prevail Optoelectronic Equipment currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hangzhou Prevail Optoelectronic Equipment you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.